Moral & Legal Obligations to Pay Charged-off Debt

The U.S. government has around $21 trillion ($21,000,000,000,000) in debt – which is by any measure, enormous. That noted, the U.S. also has assets that that far outweigh our overall debt. Those aren’t liquid assets mind you, so it’s not like the U.S. can just write a check for its bills. I only make the point to illustrate that our country, by no means, has a balanced budget. In seems therefore incongruous that consumers are so harshly judged, with the average household currently owing more than $16,000 on credit cards alone.

With student loan debt balanced on the shoulders of college grads like the weight of the world, it’s no wonder why only a small percentage can keep up. According to both CNN and Reuters, more than 33% of all Americans have debt in collections. So, when you start to get in panic mode about your bills, what are your obligations if things go too far and a company writes your account off as a bad debt?

If you search the net, it seems like no one ever clearly explains why as a consumer, you still owe money to anyone, once a credit card company writes you off as a bad debt. In my research, which is extensive, I’ve never found any singular law that states that when you default on your credit card debt and the company writes that debt off as a loss (charges off the debt) you have any obligation whatsoever to pay back that debt.

What credit card companies are correct in saying, is that you initially signed an application that included an agreement to pay back what you borrow. You also confirm that agreement every time you buy something using that card. You have, in point of fact, signed a contract. This contract expressly and implicitly defines the terms of your agreement, no matter what the company does in reference to their bookkeeping.

The un-paid debt associated with that agreement is essentially never eliminated. With the exception of only two States, that debt is yours, now and forever. It’s only the fact the the government has instituted a statute of limitations on collecting and reporting that debt that you eventually get to a point that you are no longer under any legal obligation to pay anyone anything anymore. The debt still exists somewhere in the universe but it’s no longer a valid part of your credit.

The issuers of credit cards are actually obligated by law to write off non-paid credit accounts after 180 days of inaction on your part. As part of that process, the issuers of credit cards do typically sell your account to a collection agent. Therefore, on top of the interest, late fees, over-limit fees and legal fees, they also make money selling the debt of many thousands of account holders – which is all perfectly legal.

Unless you’re a criminal, everyone knows you didn’t apply for that credit card intending not to pay back what you owe. If you’re going to exist in a commercial world, you realize that you need a good credit rating. You have however, gotten into a situation, be it job loss, medical bills, the death of a loved one or some other life issue and you just can’t afford to pay back everything you have on your plate. I get that - and so do the collectors, even though they pretend you have no options except to pay them.

So, what do you do? You do what everyone else does. You make sure you have roof over your head, food to eat, heat in the winter and a way to get to a job – if you have one. Everything else waits. You want to work in your chosen field of expertise and you wind up taking anything that pays the bills. Since inflation has far outpaced the cost of living, how are you supposed to keep up? The answer is, unless things drastically change - you can’t.

Quoting from an article on “YourLegalLegUp.com”:

“Credit cards in essence involve a loan – at an extremely high rate of interest: the issuing bank "lends" you the money to pay a merchant for some service. Interest payments on loans are supposed to cover two things: risk of nonpayment and the loss of the present use of the money. In other words, interest payments are designed to cover the fact that you're giving the money back later (called “discounting” for time) and the risk that you won't pay it back at all.

The way you discount for time is easy. You look at the inflation rate, taking a guess as to whether it will continue or not. The present inflation rate is somewhere between one and four percent, and the banks are, in any event, borrowing the money from the Federal Reserve for much less than one percent. That means that almost the entire interest rate either provides the banks an obscene rate of profit or pays for a risk of loss of approximately 30%. It also means that loans are business propositions which contemplate a very significant risk of loss (much higher than the actual loss would justify) – a risk that is paid for by the borrower on every loan that is repaid.

Any loss on a loan is more than adequately repaid by this premium on other loans to people with the same credit standing.” <end>

Given the fact that the issuers of credit cards hide themselves in States that allow them to charge huge amounts of interest on credit accounts, how absolutely absurd is it that they’re trying to guilt you into paying what you simply can no longer afford to pay? We’ve all seen APR interest rates of 30% on cards. You may be shocked to know that the legal allowable interest rate on credit cards is 79.9% as long as the issuer fully discloses the terms as required by the federal Truth in Lending Act. They don’t care about you, your stress level or life challenges. As the article states, the credit issuers have more than covered their losses. It then becomes how to squeeze every last dime out of you.

Surprisingly, Federal law doesn’t mandate interest rate limits for credit cards whatsoever. Credit card companies are supposed to follow federal rules under the Credit Card Accountability, Responsibility, and Disclosure Act of 2009. Many find ways around the law.

Only some states have "usury" laws that limit the amount of interest a lender is allowed charge on a debt. That said, the credit card lobby has massive influence on lawmakers. That influence has yielded federal court decisions, determining statutes that have all but exempted credit card companies from usury interest rates.

According to FindLaw.com “This means that there are no limits on credit card interest rates in practice, even if certain limits remain on the books.”

To add insult to injury, collection agents have and do try to collect on “stale” or “time-barred” debts that have long passed the legal statute of limitations. If you keep yourself vigilant and credit-aware, you can stop them cold by informing them in writing that you know your rights and to cease and desist. As a matter of fact, you can actually sue a debt collector who’s behaving illegally and receive actual cash in the form of lost wages, legal fees and punitive damages. You can also form a class action lawsuit and receive up to half a million dollars or 1% of the collector’s net worth, if the same collector has taken similar action against other consumers.

So, do you have a “legal” obligation to pay back charged-off debt? Technically yes, but in most cases, why would you? You still can’t afford it; they’ve closed your account; they’ve charged you lots of fees on top of your actual debt so they can write-off as much as possible; your credit is damaged; there are often implied threats made against you such as legal action or wage garnishment (which is illegal but done anyway); your credit file will likely list this at least two times for seven years and they have a collection agent after you.

You also need to remember that once a debt gets into the hands of a collection company, the original credit issuer has lost or gained all the money they ever will. After a charge-off, there is no provision in the law wherein the credit originator can any longer accept payment from you on your debt. They would then have to accept that payment on a closed account and report the payment as income – which will never happen. So, who then are you paying?

Any payment you make will only benefit the collector who literally paid only pennies on the dollar to overtake your debt. In addition, if you choose to pay them even $1 in an effort to be a good and moral person, you re-set the clock on your debt and they have the right to re-list your debt as if it were new.

If you choose to “settle for less than the amount owed”, the collection agent will list the debt as just that in your credit report and you’ll take a major hit on your FICO score. If you settle the debt and "benefit" more than $600 of the amount owed (Debt = $5,000, you pay $1,100, Collector reports $3,900 to the IRS as income) the collection agent will report the amount “saved” as income to the IRS. If you happen to be getting near the statute of limitations, the collection agent can choose to “forgive the debt” altogether and report the entire amount owed as a loss, which again, is considered part of your income to the IRS. You’re then obligated to pay the taxes on that income. The ability to report prior debt as income to the IRS benefits no one and only exists to further damage the consumer.

I'll give the only instance I know of, where communicating with the creditor actually worked. I had two accounts with Kohl’s. The first was an individual account in my name. The second was in my mother’s name. I was an authorized user on her account because I handled her accounting and needed access to pay bills. Through a combination of human and computer errors, the payments to my Kohl’s charge kept being credited to my mother’s account. She had a zero balance, yet every month her account showed a credit – which she gave to my sisters to spend! I kept auto-paying the account online never noticing there was a problem. Five months later the account was written off as a bad debt! I checked and re-checked and finally found the error. I said “why after having an account in good standing for ten years would I choose not to pay off a $500 balance?!” Arguments ensued with lots of “nothing we can do, it’s already been charged-off and reported to the credit bureaus.” Finally, by complete accident, I got a hold of Kohl’s newly hired Director of Consumer Affairs who worked with me to rescind the charge-off and worked out a plan to settle the debt in full. Miracles do happen.

You do have several remedies at your disposal for dealing with a charge-off. Principally, communication to work out the problem. You can also opt to simply pay nothing and wait until the debt gets too old and drops off your credit report. You can dispute the debt as inaccurate, noting that most listings have lots of inaccuracies and that a dispute stops collection until it’s proved valid. You can go to debt counseling or file bankruptcy.

Should a creditor or collector sue you in court, you can and should show up to argue against them (seeking some measure of legal counsel ahead of time). From inaccurate reporting to identity theft to simply having too much on their plate, you may very well have the case dismissed due to fact that you’re the only one who showed up to argue its validity.

So, do you then have a “moral” obligation to pay back debt that has been charged-off? The answer is “NO”.